401(k)- A Path to a Healthy Retirement

Whether you’re thinking of retiring soon or whether retirement is way down on your list of your priorities, it’s never too late—or too early—to investigate your options. In this post, we discuss some of the ins and outs of one of today’s most popular retirement plans: 401(k)s.

The 401(k) plan is named after the section of the U.S. tax code that governs it. It is offered through your employer and can provide you with tax-deferred savings, lower taxable income, and, in many cases, matching, or “free,” money from your employer.

If your company offers a 401(k) plan, you probably should be participating in it to the fullest extent possible, says Stephen Dobrow of Primark Benefits in Burlingame. Stephen works closely with Accretive Wealth Management in helping our business clients establish and administer their 401(k) and other pension plans.

Contributing to a 401(k) is a painless means of saving for retirement. “It’s a way for employees to take money out of their paychecks on a regular basis,” Stephen notes. “By investing the money directly into your 401(k) plan and by increasing your contribution whenever you get a raise and, ideally, each time you celebrate your birthday, you can build your retirement funds efficiently and painlessly.”

How much should you contribute? “Find the spot where it finally hurts to be contributing, and then back off a little,” Stephen advises. Most people can contribute 8% or more without even noticing it, he adds.

One reason that contributions to a 401(k) may not hurt as much as you think is that they come out of your paycheck before taxes are withheld. This means that your paychecks won’t be reduced by the full amount you’re contributing. For example, if you contribute $400 a month to your 401(k) and your combined income tax rate is 25%, your take-home pay would be reduced by only $300.

In most cases, individuals can contribute up to $17,500 in 2013—and those over age 50 can “catch up” on saving for retirement by contributing up to an additional $5,500. These amounts are adjusted for inflation, so they can change annually.

Many employers also will provide matching funds up to a stipulated percentage of your contribution, essentially providing you with “free money” dedicated to your retirement. This is called the “employer match.” Amazingly, many employees don’t take advantage of the match, which means they’re leaving free money on the table.

Companies offer their employees this benefit in part to attract and retain talented workers, but it benefits them in another big way: business owners can also participate in 401(k) plans, so they may find them as beneficial as their employees do. In addition, through tax credits, the government will pay the company some or all of the costs of hiring a pension administrator to implement and administer the program. So, if your employer doesn’t offer a plan, you might want to ask management to consider implementing one.

It’s important to make sure that the beneficiary you name in your plan is the person who will actually receive the funds in the event of your death. For example, even if you name someone else as your beneficiary, your spouse would normally receive those funds unless he or she has formally waived the right to them. This, by the way, applies to divorced spouses as well as current ones.

In most cases, when determining how to invest in your 401(k) plan, you’ll want to consult your financial advisor. However, if you don’t have a financial advisor, Stephen recommends going with the plan’s “default fund.” Unlike the potpourri of funds you may choose for yourself, the default fund is typically actively managed and periodically rebalanced. In addition, and particularly in these days of very low interest rates, you’ll probably want to stay away from allocating any significant portion of your plan to money market funds.

Whether you make your own investment decisions or rely on the advice of your financial advisor, we recommend that you review the performance of your plan assets regularly. As market conditions change, the investment strategy you’re following in your 401(k) plan may need to change too.